Peter Walford, Partner, based in Monaco explains that the EU Succession Regulation means that some European countries will have to deal with trusts over local assets much more frequently than in the past.

Wealthy international families are frequently accused of using trusts and other such knavish tricks in an attempt to avoid or evade their tax obligations.

This is not a new accusation. As long ago as 1535, in England, The Statute of Uses was passed, in the reign of “our most dread Sovereign Lord King Henry the Eighth”, for the “extinguishment of all such subtle practised Feoffments, Fines, Recoveries, Abuses and Errors heretofore used and accustomed in this Realm, to the Subversion of the good and ancient Laws of the same”, “to the Intent that the King’s Highness, or any other his Subjects of this Realm, shall not in any wise hereafter by any Means or Inventions be deceived, damaged or hurt, by reason of such Trusts, Uses or Confidences.”

There is disagreement among legal historians about the precise effect of the Statute, but if it was an attempt to abolish the trust, it did not succeed. The trust is essentially so ethereal a concept that it proved more difficult to kill off than two of Henry’s unfortunate wives.

It is ethereal or delicate in the sense that, in the jurisdictions where it is a central legal concept, notably England and those countries whose law is based on English principles, a trust can arise without any of the parties to the trust being aware of it. It can be implied by law, or imposed by law. It is also ethereal in the sense that it is not a legal entity. Nor, in the strict sense, is it a contract. It is thus an elusive thing to tax.

Where is the public spirit?

In the countries where the trust concept took root, the aim has been to try and ensure that property held in trust is taxed in broadly the same way as property held absolutely. A balance was struck to support the freedom of the individual to protect his property from dissipation by future generations, while seeking to ensure that trusts could not last indefinitely.

This balance has been disturbed in modern times, with a more punitive approach to tax. In the UK now, if an individual wishes to provide for his children, but is concerned that his children at the age of 18 might be too immature to deal with assets wisely, he would want to set up a trust so that they do not become entitled to benefits until they reach a more mature age. This would now tend to attract an extra charge to tax. There is usually a public policy motive in tax legislation, for example it is a good thing to encourage people to invest in businesses, because such investment will help the economy to grow. Yet it is hard to discern the public policy in encouraging children to become owners of property at 18, when it is likely to remove the incentive to strive to get a good education and develop a worthwhile career.

Implications of the EU Succession Regulation

Of course, in mainland Europe there is generally less flexibility in terms of passing property to the next generation. Children have the right to inherit on the death of their parent and their right to the estate cannot be postponed beyond the age of majority. Trusts are therefore regarded with even more suspicion, not only as means of avoiding tax but also as attempts to deviate from the inheritance rights that local law confers on children.

In France, trusts, when validly established under a foreign law, have long been recognised by the French courts. With the passage into law of the EU Succession Regulation, allowing an individual to elect for his will to be governed by his national law, it is likely that France and the other EU states that have signed up to the EU Succession Regulation will have to deal with trusts over local assets much more frequently than in the past. However, this will come at a tax cost.

Since 31 July 2011 there has been a comprehensive reporting regime for any trust with a relevant French connection. The connection can be the French residence of the settlor or of a beneficiary, the French location of a trust asset or the French residence of a trustee or administrator. French trust tax rules aim to ensure that French wealth tax and succession duty are paid by reference to the trust assets, as if owned outright by the settlor or the beneficiaries, as the case may be.

Global tax transparency

Another modern development, as part of the international trend towards more tax transparency and the continuing fight against money laundering, is the pressure for the identity of those who create and benefit from trusts to be made public. So far, information about trusts is generally made available only to tax and law enforcement authorities. However, there is likely to be growing pressure for more publicity.

In conclusion, all this means that people who wish to protect their wealth for future generations will have to take more care than ever before to ensure that the trusts or other asset-holding entities they establish are compliant and fit for purpose. Trusts, with their inherent flexibility and adaptability, still offer advantages but they are not to be undertaken lightly.

Back to Intouch

Maitland is licensed as required for the services it offers. For further information on the licence permissions applicable to your jurisdiction please visit our website at maitlandgroup.com. The content and opinions herein are for information purposes only. They are not intended to constitute legal, financial or other professional advice, and should not be relied upon as such or treated as a substitute for specific advice relevant to particular circumstances. Neither Maitland as a group nor any of its member firms or affiliated entities accepts any responsibility for any errors, omissions or misleading statements in this publication, or for any loss which might arise from reliance on the material. No mention of any organisation, company or individual, whether on these pages or not, shall imply any approval or warranty as to the standing and capability of any such organisations, companies or individuals on the part of Maitland. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. Please note that, whilst all reasonable care has been taken to ensure the correctness of this publication, the information may not be applicable for all jurisdictions. Read our Data Protection Policies.

Login

Lost your password?
massa Curabitur mattis dolor. felis accumsan dapibus non leo.